The other day, my friend called and asked if I had a blank copy of an apartment lease. He had a new roommate moving in and wanted to protect himself from liability. We got into a conversation and he said the main reason for the lease was so that his security deposit would be protected should his new roommate accidentally or intentionally damage the apartment. My friend had contacted the property owner and they were fine with him switching roommates, but said he was on the line should anything get damaged. The purpose of a security deposit is to allow an owner to have some recourse against a tenant should the tenant cause damage to an apartment unit.
A security deposit is an amount of money that is placed up against a unit. Just as a bank will use a property as collateral against a loan, a property owner will use a deposit as security against a rental unit. Cities in L.A. County have limits on the amount of monies that can be collected from a tenant for an apartment security deposit. In most cities, the maximum allowable security deposit for a one-year apartment rental is two-months rent. A security deposit can be a large amount of money for many renters.
For example, if a two bedroom, two bathroom apartment rented for $2,200/month and the owner required two-months rent as a deposit, that would translate into $4,400, plus whatever the prorated rent for the month was at the time of move-in. Even split with a roommate, that amount of money is no small amount for many renters
Renting to someone you do not know is a tricky situation. Real estate investors and property owners must rent to tenants so their properties generate revenue. Even ancillary income, such as laundry income, comes from tenants. In a rental property, cash flow is derived from the gross income — paid by tenants — minus expenses and debt service. Most investors do not have enough friends to fill their properties. And I know several owners who would not rent to their friends for fear of jeopardizing a friendship should the rental arrangement go south.
Over the years, I have had the privilege of hearing multiple horror stories from owners who had at least one bad tenant destroy a unit. One such story involves a bitter tenant who lost her job and was unable to make the next month’s rent. Instead of leaving the apartment, she decided to stay and be evicted. She left the water running in her unit 24 hours a day. Since the owner paid for the water, his bill went up substantially, but that was not the worst of it.
While going through the eviction process, the tenant had her friends remove all the plaster from the inside of the unit, including the ceiling. She also damaged the refrigerator, stove and removed all the cabinet doors in the kitchen with a hammer. To finish the job she broke both bathroom sinks and removed all the hardware from the interior doors out of spite.
Of course, this is an extreme case, but even after the owner took her to court and won, she was unable to pay him anything since she was still unemployed. The owner was stuck having to pay over $15,000 to renovate the unit.
The owner had collected two months rent from the tenant, but that did not begin to cover the damages the tenant caused. This example of the nightmare tenant illustrates why apartment owners are cautious about whom they allow into their properties and why they collect a security deposit. In the end, even with a security deposit, an owner can lose more money than the tenants puts up.
After talking with my friend and telling him why security deposits were collected, he decided that his new roommate and him would sign a new lease with the apartment owner so he was not the sole person on the hook for damages to the unit. No one likes putting up a security deposit, but it is easy to forget why they are requested. At the end of the day, a tenant can cause far more damage to a unit than they can put up as a security against an apartment.
Mike Heayn is a Commercial Loan Consultant, specializing in Multi-Family Lending. He can be reached at (310) 428-1342, or e-mailed at firstname.lastname@example.org.